From Forbes

Herbalife is a network marketing company that sells weight management, nutritional supplements, energy, sports and fitness, and personal care products worldwide. Herbalife offers its products through retail stores, sales representatives, sales officers, and independent service providers. The company was founded in 1980 and is based in Grand Cayman, the Cayman Islands.

Herbalife the target of short seller Bill Ackman

In a mid-December 2011 conference, Bill Ackman disclosed that he is short approximately 20 million shares of Herbalife. The total short interest as of the end of December was approximately 37 million shares. Ackman asserted that the company is nothing short of a pyramid scheme and will end up at $0.00. To further substantiate this claim, Ackman needs the FTC to investigate the company and despite recent rumors and Freedom of Information Acts, there has been no such investigation.

In early January, Dan Loeb’s hedge fund Third Point filed a 13G that stated it acquired 8.9 million shares and the stock officially became a battleground stock. It wasn’t long after that point that Carl Icahn became involved as well and the billionaires went at it on live television.

More recently, the CEO of POST also threw his hat in the ring and bought a 5% position in the company. As an operator in the space and having done his own due diligence including becoming a HLF distributor, the bets are piling up against Bill Ackman.

Estimates for Herbalife have been rising of late. The Zacks Consensus Estimate for 2013 for HLF stood at $4.66 as of February 2013. By June of this year, the consensus had risen to $4.81. The consensus has since moved higher to $4.99. Over the same time period estimates for 2014 have moved from $5.40 to $5.52 and are now at $5.68. This implies earnings growth of 13.8%

Valuation

Herbalife trades at some very attractive multiples. The trailing twelve months PE of 14.6x is well below the 20x industry average. Similarly, the 14x forward P/E multiple is also trading at a discount to the 18x industry average. Price to sales multiple of 1.6x has the company trading at a premium to the industry average of 0.5x. One metric I like to focus on is the net margin and HLF sports a 11.3% net vs a 3.8% industry average. Given the low multiples and substantially higher net margin than the industry, it is apparent that the valuation is still depressed based on the resistance from short sellers as investors are still cautious on the idea of the stock being a pyramid scheme.

A quick look at the price and consensus chart shows that despite claims of a pyramid scheme and numerous bear attacks on its multi level marketing model, the company continues to get higher and higher earnings estimates. The gaps between the colored lines show the continued growth in earnings, just what growth investors want to see.

Disclosure: I am long HLF in my trading and IRA account. In fact, it’s the only stock I own.

Brian Bolan is a stock strategist for Zacks.com. He is the editor in charge of the Zacks Home Run Investor service and Breakout Growth Trader.

Herbalife (HLF) is the subject of a lot of controversy and it is also a Zacks Rank #1 (Strong Buy). Herbalife has topped the Zacks Consensus Estimate in each of the last 28 quarters, which is a pretty unique accomplishment. The last two beats were $0.20 and $0.22 — but put in better perspective when you look at the percentage surprise. The March 2013 quarter came in 18.7% ahead of expectations and the June 2013 quarter was 18.5% ahead of analysts’ estimates. Those are some pretty big beats.

For more on this story go to:

http://www.forbes.com/sites/zacks/2013/10/07/herbalife-full-of-favorable-fundamentals/